Succession Planning in a Family-Owned Business

If you own a business, you’re well aware of the blood, sweat, and tears that went into making it successful. You likely have systems in place to keep it running smoothly, but do you have a plan for what will happen when you step down or retire?

You’re not alone if you don’t: nearly 66% of family-owned businesses don’t have a documented succession plan in place, according to PwC’s 2023 US Family Business Survey.

As a respected financial planner for business owners in Northern Colorado, Dunnigan Financial can create a personalized succession strategy to safeguard your assets and strive to ensure a smooth transition. 

Succession planning refers to the strategy for passing leadership roles from one owner/employee to another. For a family-owned business, succession planning can involve family members, long-time employees, or even a third party. 

To reap the ultimate benefits from a succession plan, there are several questions to ask yourself regarding business valuation and the transfer of ownership. 

To make an effective succession plan, you need to have an accurate assessment of what your business is worth. There are main three methods to accomplish this:

• Market-based, which assesses comparable companies to determine the company’s value
• Cost-based, which is calculated by subtracting the business’s liabilities from its assets
• Income-based, which looks at cash flow to determine the value

Your financial advisor can provide recommendations on what approach would be suitable for your specific business. 

One of the most important decisions in your succession plan is how you’ll transfer ownership of your company. There are a few options, each with their own advantages and drawbacks. 

Perhaps you’ve already identified the person who will lead your company after you leave. Whether that’s a child, sibling, or other relative, you may decide to gift the business to them. 

If you do, there are two routes you can take:

• Gifting the entire business at once 
• Gifting the business in pieces, over a period of time

Gifting the business over time allows you to take advantage of the annual gift tax exclusion, where you can give up to $19,000 to a person without incurring a taxable gift. 

Gifting the business at one time could eat into your lifetime gift and estate tax exemption, which is $13.99 million in 2025 (but is currently set to decrease to $5.49 million in 2026). However, the benefit of selling all at once is that the deal is fully done, and you can move away from the business cleanly.

Many business owners opt to sell the business to their chosen successor. While many businesses would prefer to sell the company outright, the new owner may not have the capital available for such a large purchase.

In this instance, a seller-financed, long-term installment note could allow the buyer to pay an agreed-upon sum over a period of time (typically several years). While this can help spread out your tax liability, you then run the risk that at some point, the buyer may be unable to continue making payments. In this case, it’s best to have your financial succession advisor build safeguards into your agreement, such as regaining operating control of the business if payments are missed.

While these are important questions to ask yourself, there are many other critical factors to keep in mind as you develop your succession plan, such as retirement strategies and estate planning strategies. 

Dunnigan Financial has the experience and expertise to design a personalized succession road map that will pave the way for a smooth transition while safeguarding your wealth. Contact us today to see what your succession plan could look like. 

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.